Budgeting is the best way to get a better handle on where your money is going — which can help you get a better handle on where you’d like to see your money go.
But before you dive into the nitty-gritty of each individual line item on your ledger, you first need to understand the difference between fixed expenses and variable expenses.
As their name suggests, fixed expenses are those that are fixed, or unchanging, each month, while variable expenses are the ones with which you can expect a little more wiggle room. However, it’s possible to make cuts on items in both the fixed and variable expense category to save money toward bigger financial goals, whether that’s an epic vacation or your eventual retirement.
Let’s take a closer look.
What Is a Fixed Expense?
Fixed expenses are those costs that you pay in the same amount each month — items like your rent or mortgage payment, insurance premiums, and your gym membership. It’s all the stuff whose amounts you know ahead of time, and which don’t change.
Fixed expenses tend to make up a large percentage of a monthly budget since housing costs, typically the largest part of a household budget, are generally fixed expenses. This means that fixed expenses present a great opportunity for saving large amounts of money on a recurring basis if you can find ways to reduce their costs, though cutting costs on fixed expenses may require bigger life changes, like moving to a different apartment — or even a different city.
Keep in mind, too, that not all fixed expenses are necessities — or big budget line items. For example, an online TV streaming service subscription, which is withdrawn in the same amount every month, is a fixed expense, but it’s also a want as opposed to a need. Subscription services can seem affordable until they start accumulating and perhaps become unaffordable.
Recommended: Are Monthly Subscriptions Ruining Your Budget?
What Is a Variable Expense?
Variable expenses, on the other hand, are those whose amounts can vary each month, depending on factors like your personal choices and behaviors as well as external circumstances like the weather.
For example, in areas with cold winters, electricity or gas bills are likely to increase during the winter months because it takes more energy to keep a house comfortably warm. Grocery costs are also variable expenses since the amount you spend on groceries can vary considerably depending on what kind of items you purchase and how much you eat.
You’ll notice, though, that both of these examples of variable costs are still necessary expenses — basic utility costs and food. The amount of money you spend on other nonessential line items, like fashion or restaurant meals, is also a variable expense. In either case, variable simply means that it’s an expense that fluctuates on a month-to-month basis, as opposed to a fixed-cost bill you expect to see in the same amount each month.
• Fixed expenses are those that cost the same amount each month, like rent or mortgage payments, insurance premiums, and subscription services.
• Variable expenses are those that fluctuate on a month-to-month basis, like groceries, utilities, restaurant meals, and movie theater tickets.
• Both fixed and variable utilities can be either wants or needs — you can have fixed-expense wants, like a gym membership, and variable-expense needs, like groceries.
When budgeting, it’s possible to make cuts on both fixed and variable expenses.
Recommended: Grocery Shopping on a Budget
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Benefits of Saving Money on Fixed Expenses
If you’re trying to find ways to stash some cash, finding places in your budget to make cuts is a big key. And while you can make cuts on both fixed and variable expenses, lowering your fixed expenses can pack a hefty punch, since these tend to be big line items — and since the savings automatically replicate themselves each month when that bill comes due again. (Even businesses calculate the ratio of their fixed expenses to their variable expense, for this reason, yielding a measure known as operating leverage.)
Think about it this way: if you quit your morning latte habit (a variable expense), you might save a grand total of $150 over the course of a month — not too shabby, considering its just coffee. But if you recruit a roommate or move to a less trendy neighborhood, you might slash your rent (a fixed expense) in half. Those are big savings, and savings you don’t have to think about once you’ve made the adjustment: they just automatically rack up each month.
Other ways to save money on your fixed expenses include refinancing your car (or other debt) to see if you can qualify for a lower payment… or foregoing a car entirely in favor of a bicycle if your commute allows it. Can you pare down on those multiple streaming subscriptions or hit the road for a run instead of patronizing a gym? Even small savings can add up over time when they’re consistent and effort-free — it’s like automatic savings.
Of course, orchestrating it in the first place does take effort (and sometimes considerable effort, at that — pretty much no one names moving as their favorite activity). The benefits you might reap thereafter can make it all worthwhile, though.
Saving Money on Variable Expenses
Of course, as valuable as it is to make cuts to fixed expenses, saving money on variable expenses is still useful — and depending on your habits, it could be fairly easy to make significant slashes. For example, by adjusting your grocery shopping behaviors and aiming at fresh, bulk ingredients over-packaged convenience foods, you might decrease your monthly food bill. You could even get really serious and spend a few hours each weekend scoping out the weekly flyer for sales.
If you have a spendy habit like eating out regularly or shopping for clothes frequently, it can also be possible to find places to make cuts in your variable expenses. You can also find frugal alternatives for your favorite spendy activities, whether that means DIYing your biweekly manicure to learning to whip up that gourmet pizza at home. (Or maybe you’ll find a way to save enough on fixed expenses that you won’t have to worry as much about these habits!)
Fixed expenses are those costs that are in the same amount each month, whereas variable expenses can vary. Both can be trimmed if you’re trying to save money in your budget, but cutting from fixed expenses can yield bigger savings for less ongoing effort.
Great budgeting starts with a great money management platform — and a checking and savings account from SoFi can give you a bird’s-eye view that puts everything into perspective. You’ll also have access to the Vaults feature, which helps you set aside money for specific savings purposes, no matter which goals are the most important to you, all in one account.
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